The economic impact of the IT industry extends much beyond $40 bn in revenue and some 2 mn employees. Economists reject the criticism that the industry has drawn from some quarters of late, putting the blame on faulty policies while lauding the industrys role in bringing about a fundamental change to the way Indian business worked. The next step to sustain the momentum is build world-class higher education

Much before the Tatas bought Jaguar/Land Rover (or for that matter Corus), much before Vijay Mallya owned a Formula 1 team, and much before the Ambani brothers made it to the top echelon of the richest businessmen in the world, the global business community had already developed a healthy respect for Indiathe erstwhile land of Yoga, Kama Sutra, elephants, and snake charmers. It was not the achievements of a few iconic Indians but the work of thousands of young Indian engineers that had won this recognition. These engineers, who first helped global businesses by not letting them get into a disaster at the turn of the centurywhat was called the Y2K problemand subsequently kept doing more and more to solve their business problems through IT have long served as Indias new brand ambassadors (more correctly, new Indias brand ambassadors), well before the world started recognizing the Indian growth story or Goldman Sachs coined the acronym BRIC.

Way back in 2000, in a Shanghai metro rail, one Chinese computer developeryes, that is what he described himself asstruggling to speak English, immediately started asking about Wipro, Infosys, and Sattiam (Satyam) when he learnt that he was speaking to an Indian. And mind you: that was five years before Tom Friedman famously paraphrased Nandan Nilekanis thoughts that the world was fast leveling out.

Today, few dispute Indian IT industrys role as the earliest brand ambassador of Indian business, thanks to numerous foreign writers who have recorded the journey, hundreds of analysts who have analyzed it and a larger number of academicians in US universities who have studied the phenomenon thoroughly. What has not got even a fraction of that attention, albeit a few largely academic studies here and there, is how Indias IT industry has had a very tangible ripple effect directly and indirectly on the broader Indian economy. Yes, there have been anecdotal references to the employment generation but as many point outand rightly sothat while the speed of that employment generation has been unprecedented, not just in India but anywhere in the world, as an overall percentage of the Indians in the working age, that is still too small.

As a result, some have even started questioning if the IT industry deserves all the pampering that it is getting. Well, you can say IT is India, if you are referring to the TINA factor of India in the offshoring business, said a top bureaucrat in a television debate. But that does not mean India is IT, he added.

Of late, sections of policy makers have been echoing the same sentiment. A critic even described the tax concessions offered to the IT export units as subsidizing American corporations IT budget by Indian taxpayers money. This view has found its reflection in the last two Union Budgets. While acknowledging the role of IT per se in nation building (as seen from the thrust on e-governance) the finance minster has not found enough reasons to continue with the STPI scheme, which many believe is the prime catalyst in making IT services exports so widespreada virtual cottage industry in India.

There has also been somethough scantcriticism of whether a large and fast growing export-focused industry is even good for the overall economy considering that the domestic Indian industry, which is witnessing unprecedented growth, competes intensely with the former for a common resource: manpower.

This story is an attempt to look at the tangibleeven if not always quantifiable (as in building Brand India) impacts that Indian IT services exports industry has had on the overall national economy and examining how valid are some of the criticisms.

Most of the data and points have come from some of the early works in this area. Notable among them are the studies of Professor Nirvikar Singh of University of California, Santa Cruz, who has published multiple papers on the subject; Dr Rashmi Banga, senior economist, UNCTAD, whose 2005 paper remains the only serious balanced paper on the critical issues on Indias services-led growth; CRISILs study on the subject done for Nasscom, released in early 2007, and the recently released Nasscom Foundation report on Indian IT Industry: Impacting Economy and Society, prepared by Deloitte. For anecdotal, but impactful paradigms, we have turned to Raman Roy, BPO pioneer, and arguably the first one to articulate the indirect impact of the IT/BPO industry on Indias development, much before agencies like CRISIL and Deloitte quantified that.

Indias Services-led Economy & IT
Call it unique characteristics of Indias knowledge culture or simply a late mover phenomenon, Indias economic growth in the last few decades has been driven almost entirely by services. While the faster growth in services by itself is not a unique phenomenon, the cycle Indian economy has followed is fairly unique.

Notes a paper, Critical Issues in Indias Services-led Growth, by UNCTAD senior economist, Dr Rashmi Banga: During the 1990s, the contribution of the service sector to the growth rate of GDP was nearly 60% in contrast to 54% in middle-income countries, 43% in least developed countries and 34% in China. High share of services in GDP is a unique feature of the Indian economy as in other developing countries, decline in the agricultural sectors share has been followed by growth in the manufacturing sectors share, and the shift toward the services sector has occurred only in the final stages of growth.

Today, services account for more than 60% of Indias GDP. Most developing countries, other than Mexico and South Africa, have a much lower contribution of services to GDP. What is even more unique is the ratio of services to manufacturing. With the exception of the US and France, no other large economy has a services sector that contributes more than three times of what manufacturing does! Indias manufacturing sector contributes only 19.3% of the GDP, while agriculture contributes marginally more.

While growth in services is good and shows that India is fast entering the league of mature markets, there are some critical issues that have caught the attention of economists.

Dr Banga herself raised a few questions in the paper. She pointed out that while in many countries growth in services is accompanied by a growth in employment in those sectors, in India that has not been the case. The extraordinarily impressive growth in services has not been followed by corresponding growth in employment in services industries. In fact, the rise of share of services employment has been much lower than the decline in the share of employment in agriculture and manufacturing. In the year 2000, while services contributed close to 50% of the GDP, its employment accounted for less than 30% of the total employment. In contrast, in an economy like Singapore, which has a 66% share of services output in GDP, 70% of its total employment is in services. This disproves the theorysuggested by somethat services employ less people.

The paper itself provides some insights to the reason. It finds that the specific services that have grown the maximum have also recorded the maximum productivity, thus, explaining the jobless growth. Indias IT services exports industry stands right at top here. One of the fastest growing sectors among services, this sector has also been the most productive. As a result, employment in these sectors has not kept pace with the growth of output. This has impacted the overall employment in services. Sectors like trade, hotels and restaurants, community services, and construction which have high employment potential have not grown as much as communications and IT services.

In a highly populated country like India, jobless growth is not always seen positively and that has been the major criticism of the Indian IT industry. Not only has it been more productive and hence less employment intensive (as compared to many other services sectors), many critics say that the jobs it has created are out of reach for majority of Indians.

Why IT Industry Matters
In the context of the above discussions, the obvious question to ask is: in a country like India, with a huge population in the working age who need employment, is IT the right sector to focus on, even if no one has major issues with the industrys growth?

The most convincing answer to the question was given by Dr Subir Gokarn, the chief economist of CRISIL during the release of the Nasscom-CRISIL Report, The Rising Tide: Employment and Output Linkages of IT-ITeS.

We are not saying that the linkages and impact of the IT industry is maximum or more than other sectors, but the fact that this is an export driven industry means that we are gaining because of international trade, he said answering a query.

In short, these businesses would have remained in the US or the UK. Instead, they are coming to India. In fact, in a 2003 paper, Offshoring: Is it a win win game? McKinsey Global Institute (MGI) quantified the value of this gain. According to the report, every dollar spent on offshoring by an American corporation results in a value creation of $1.45-1.47 for the global economy. While America retains $1.12-1.14 of that, the offshore destination (like India) gets 33 cents of that value, which is huge considering an American corporation has made the investment.

The MGI paper also measured the break-up of the 33 cents that the offshore destination gets using India as an example. It estimates that while the service provider companies retain 10 cents as profit, nine cents go to suppliers, 10 cents to employees, three cents to the central government of India and one cent to the state government.

In short, while the high productivity may not be generating a large number of jobs in these sectors, the net impact on the Indian economy is huge as it gets the jobs to India that would otherwise have been created in the US. The same is true for the business with the suppliers and the wealth that is generated by the service providers.

It is really a win win game.

Measuring the Impact
We started with the objective of quantifying the impact of the IT industry, and putting a value to that impact. However, economists themselves, including those who have extensively worked on the subject, shied away.

Not everything is quantifiable, especially some of the socio-economic impacts, says Dr Rashmi Banga, senior economist, UNCTAD.

Says Raman Roy, chairman and CEO of Quatrro BPO, and one of the first persons to talk about the socio-economic impact of the IT/BPO industry, You can see that in shopping malls, in coffee shops, in gadget stores, he says pointing to the consumption boom in lifestyle segments.

A lot of it is very hard to quantify, says Dr Nirvikar Singh of University of California Santa Cruz (UCSC). But he makes a very bold statementI believe the whole Indian growth story would have looked very different without the IT industry. He says it is beyond what economics could measuresuch as the contribution to GDP and direct and indirect impact on employment and consumption.

What we have tried here is to articulate the distinct and tangibleif not always quantifiableeconomic impact of the IT services industry. We have classified them into three categoriesdirect, indirect, and socio-economic. Most direct impacts are not just quantifiable and have been quantified, they have also been fairly well recognized. The indirect impacts are somewhat measurable using economic principles, if not always exactly quantifiable. There have been some efforts in the pastlike the Nasscom-CRISIL study to quantify them. Many of them are also fairly recognized. The socio-economic impactsusually tertiary in natureare more qualitative and arguably have more far-reaching impact than the first two. A number of these phenomena may well be measured, even though their impacts on society and economy may be difficult to assess today. Take, for example, bridging the gender gap. While it is possible to measure the wage difference between male and female professionals in the IT industry and how that compares with that in other industries, that by itself does not measure the impact on society.

Direct Impact
First things first. Two things stand out when one talks of the IT services (including BPO) industry: growth in revenue and employment. The IT/BPO exports industry is expected to cross the $40 bn mark in revenues in 2007-08, more than double of what it recorded in 2004-05. That is despite a drop in exchange rates during 2006-07, making offshoring somewhat costlier for US enterprises.

Contribution to GDP: The IT/BPO exports industry has steadily increased its contribution to the national GDP. From just about 1.8% at the turn of the century, it rose to 5.4% in 2006-07. Measured as a percentage of the services sector, that is 9% of Indian services. In fact, the IT exports industry has contributed significantly to the rapid rise of share of services in GDP, a phenomenon fairly unique to developing countries.

Direct employment generation: According to Nasscom, the direct employment in the IT/BPO industry is estimated to be about 2 mn by the end of 2007-08, growing at a CAGR of 26% in the last decade. As per data from ministry of Labour & Employment, IT services accounted for 12% of Indias total employment in the organized private sector, making it the largest among all such sectors. While this itself is a reason enough to claim that India is IT, the indirect employment generation by the industry is even more impressive.

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